On the face of it, Microsoft’s IR program has had no serious bugs. The stock price has climbed through seven splits in ten years, and the company is now a global corporate giant. However, in the early years the beta version of the IR program sometimes froze under the pressure of competing instructions. It was run by a very small team that simultaneously handled real estate and other demands competing for their processing time, leading to a less than stellar experience for analysts and investors alike.
Then, three years ago, senior management rewrote the code. New IRO Carla Lewis now reports directly to the CFO, and her seven staff members run a dedicated operation that wins plaudits from their audience and prizes from their peers. Not only is Lewis good at it, she enjoys the job. ‘We work with a very sophisticated group of analysts and shareholders. It’s continually fun to work with them and I have a committed team of colleagues who are always coming up with great ideas about how to advance the cause. We seem to thrive on that.’
Lewis joined Microsoft eight years ago and was assistant treasurer for five years before being tapped to take charge of IR. Since then she has learnt on the job, with the aid of informal dinners and conversations with colleagues from other large companies. Three of her team of seven are senior managers with their own area of expertise, backed up by three analysts and an administrative assistant.
Tim Halladay concentrates on all of the IR technical systems, as well as interacting with analysts, particularly on financial models of earnings performance and so forth. He supervises the stockwatch and manages Microsoft’s stock transfer agents. ‘So a lot of the effort of managing the business operations of IR happens in that group.’
Tony Dirksen is responsible for annual reports and for the company’s award-winning web site. Fittingly, he also tracks product development for investors in areas like online services and web TV as well as the Windows CE system for hand-held computers.
Vaughan Briggs looks after the constant stream of information about product areas like Windows, Office and NT Server, where the majority of the revenue comes from, and he also keeps a watchful eye on the competitive analysis. Anyone listening to the Department of Justice may wonder whether there is actually any competition left, but Carla Lewis has no such misconceptions. ‘We think we have a lot of major competitors and they keep us working hard all of the time.’
One-stop shop
Of course, Microsoft’s technology also offers opportunities to deliver the investor relations message. The web is an unparalleled means of communicating with retail investors and the company has overseen an important initiative to make it a two-way street: Last year employee shareholders voted their proxies online for the first time, after receiving the annual report online. With snail mail, the voting rate was less than 20 percent. The first electronic ballot brought out 60 percent of the employees vote.
While the online proxy delivers modest cost savings, its main interest is ‘in the category of preparation for a rainy day,’ Lewis says. The planned extension of electronic proxies to other retail shareholders should interest many IR people balancing the support they can garner from individuals in proxy fights and the difficulty of mustering their active participation. However, she also admits, ‘We really did it to feature the technology, because it was cool and employees got engaged with it. They thought it was neat.’
For the institutional investors, ‘We try to refine our methods of communication to reach people in the areas most relevant to them.’ That implies a ‘high focus on the sell-side community,’ where 27 analysts publish research on the company. Lewis points out that apart from the dedicated entourage, the major sell-side researchers may have anything up to another half dozen analysts in fields like software, internet, communications, media or consumer electronics, whose work impels them to keep a weather eye on the company. In total over 70 analysts need care and feeding.
‘We try to be the one-stop shop for the analysts. We try to stay very well informed here, since we want to handle the questions and leave the product managers to do their development work. We’re in touch with the analysts by phone almost every day, and many of them visit us here on campus. If the questions go deeper than we can answer, we can arrange a conversation with a product expert. But our policy is that analysts should come through us.’
Mutual interests
To ensure the message reaches all investors, the IR department and the corporate public relations department attend each other’s meetings. ‘Of course the Wall Street press is very influential, and Wall Street is a very sophisticated audience,’ notes Lewis. ‘So our corporate PR people are very interested in what investors and analysts are thinking.’
As for the buy-side, Lewis and her colleagues maintain a direct relationship with up to 100 institutions and pay personal visits to their offices. The list is reassuringly stable – mostly value and growth, she reports, and she takes satisfaction from the habit many have of calling to let her know when they are altering their holdings. Lewis is fearless in her visits, and has offered to visit activist shareholders like TIAA-Cref and Calpers. She reports an amicable meeting and continuing relationship with both.
One advantage of being a mega-cap is never having to say sorry to the CEO when you discover a hidden momentum player dumping stock and pulling the price down. ‘We never really have to worry about momentum players or arbitrageurs – and we’re certainly not targeting them,’ Lewis quips. And of course indexers are ‘very low maintenance’ investors. Microsoft is listed only on Nasdaq, so while it’s in the S&P, it doesn’t make the Dow. She admits to ‘reasonable indifference’ about the absence, implying that it affects the Dow’s credibility as a representative index more than the company’s standing.
International push
Microsoft’s shareholder base is some 40 percent institutional, 25 percent retail, with about 30 percent closely held by Bill Gates and other directors and officers. Less than 5 percent is held internationally. Lewis considers this spread about right, although she has been trying to grow the international holding, which has risen from just 2 percent since she took over IR. The main mechanism, apart from the company’s global corporate image, is an annual tour to Europe and a biennial visit to the far east. And since this is Microsoft, major foreign investors also get regular e-mail updates.
The only other shift is the steady decrease in insider holdings as, for example, Bill Gates continues his regular program to diversify out. For domestic investors the program of almost weekly sell-side sponsored conferences between June and September, including the earnings releases and the annual analyst conference in Seattle, help ensure that buy-siders and sell-siders do not flash up an ‘out of information’ message.
While trying to explain a big and increasingly complex company to the investment community, Lewis also has to allay concerns about the war of attrition from the Department of Justice. Her department seems to cope without panic, and has tried to integrate the response into its regular program of conference calls on separate product issues. So they treat the DoJ just like the Year 2000 issue, or a product briefing on the next version of Windows, but bring attorneys rather than product managers to discuss the issues.
Many of the conference calls are investor driven as well as management inspired. When managers report questions on an issue, ‘In pursuit of broad disclosure, instead of talking to three guys, we’ll put together a conference call, and then usually invite the top 100 shareholders and all those sell-side analysts to come on board for an informal call. But no press, since it’s not meant to be a news generating item.’ So before any filing or hearing, ‘We just loop the DoJ issues into our program and get our chief counsel on the phone.’ She concludes: ‘I think that’s been very helpful in avoiding any kind of over-reaction. We have had very stable share price performance while a very serious anti-trust investigation has been going on.’
Paying the Bill
Bill Gates himself does not monitor the share price closely. Not just because he is rich past caring, but because he works on the principle that if he looks after the business, the share price will look after itself. ‘Then it’s our job to get the information out to those interested. If they are informed, the market will make the correct valuation of the company.’ However he is the star turn at the annual analyst conference in Seattle, and will also do at least one major sell-side conference each year, as well as meeting investors on campus when available.
Other executives are more closely involved. There are 25 conferences a year, Lewis recounts. ‘Each has a different executive and a focus on a different part of the company. We think that’s a really neat way to offer consistent information and updates to the investor community.’ Of course such presentations are heavily leveraged by technology. The transcripts are posted on the web site, and the company web-casts the earnings release and annual analysts’ conference. However, with typical caution, Lewis warns: ‘The technology continues to improve all the time, but if you’re web-casting something live, it’s not always a perfect experience for the customer.’ For the earnings release, there are teleconferences with the audio available simultaneously over the internet, while the annual analyst meeting is available on the web with audio, video, slides and transcript.
One investor issue has been the ‘overhang’ from Microsoft’s legendary employee share options scheme, which Lewis vigorously defends as essential to keep employee and shareholder interests in harmony. There are currently around 446 mn vested and unvested options outstanding, compared with 2.47 bn common shares. ‘We’ve been fully aware of the potential dilutive effect of that option overhang,’ she says, and claims that the company has usually anticipated and gone beyond current regulations. ‘We’ve regularly published several different ways to look at their impact, and the chief financial officer featured it as part of the presentation at the annual analyst meeting in Seattle. We include it as an addendum to the earnings release, and we have made a quarterly disclosure.’
Overall Microsoft’s IR philosophy is that no error messages should appear on investors’ screens. Adds Lewis, ‘One thing that sets us apart, if you ask any analyst or large investor, is that we have always had a tradition of caution and a conservative outlook. We probably go out of our way to make sure people don’t forget that and get too excited about our very strong historical stock performance.’
